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The Ebbs and Flows of ESG and Climate Financing
Written by Ismail Weiliang and Matthias Ong, Corporate Engagement Head, CDP, Singapore
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ISMAIL WEILIANG
The Climatebender
MATTHIAS ONG
CDP Singapore
Views are entirely ours
and not connected to any company
Rise of ESG
It is surprising how interest in ESG has risen over the years. Despite many years of Non-Governmental Organisations (NGOs) such as WWF, Conservation International, Greenpeace, and numerous charities such as Amnesty International and Save the Children advocating for greater environmental and social responsibility, it is only recently that a switch has seemingly been flipped. Now, we see an awoken generation of politicians, investors and corporate leaders that has emerged over time. There is now an increasing global knowledge pool of how ESG should be implemented in all that we do starting with the investors through the Principles of Responsible Investment (PRI).
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Quick Take:
- There is an increasing global knowledge pool of how ESG should be implemented in all that we do.
Challenges of ESG
The path is not straightforward with financing of ESG facing numerous challenges. For every investing project that has successfully forecasted the risk and delivered social and environmental outcomes, there are others that have failed with unexpected and unintended consequences. Some green projects have found to be greenwashed whether intentionally or unintentionally, to have had shades of brown, whether from an unidentified waste stream or an exploitation of a new resource. Some investors balk at the loss of upside opportunity a purely financial driven project would have in the short-term over an ESG-linked one. Responsibility is not easy to achieve.
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Quick Take:
- There are numerous challenges in financing of ESG with failures in green projects, greenwashing, and lack of will from investors.
Drivers of Climate Financing
Climate offers some hope. Although it only represents largely the “E” in ESG, it shows a clear path of responsible action that other responsible actions can follow. And it took a significantly long path to get here. Even when the first warnings of a major global crisis first was discussed in the mid-1900s, no one heeded the call. Even when there was some global consensus from the formation of the IPCC and UNFCCC around 1990, the world was still not ready. Since then, three elements have driven climate financing, and therefore ESG, into the uncharted territories, as follows:
- A Reality: Climate is now accepted as a global emergency. Climate related disasters have surged five-fold globally over 50 years. The world has unanimously agreed that if it gets worse, it is not just an inconvenience, but that it will become an existential issue.
- Quantifiable: Driven by IPCC, CDP and UNFCCC’s work around decades of science that climate can be measured through Greenhouse Gas Emissions, carbon pricing mechanisms and quantitative links with financial assets.
- Investible: Climate is now investible, driven by the rise of the green economy. It represents an opportunity to solve it (or at least die trying) and an alternative route to economic growth as well as reversing capital flows to rebalance the markets for a more equitable world.
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Quick Take:
- The 3 drivers of climate financing are that climate is now 1) Accepted as a global emergency, 2) Quantifiable, and 3) Investible
Challenges in Climate Financing
Currently, much of the climate financing is still driven by stakeholder sentiment and regulation. We see a big push by regulation for climate financing with some countries having a longer implementation tail. Climate financing for adaptation also lags behind mitigation. Climate Policy Initiative, an analytics and advisory organisation, tracks that only 7% of the US$632bn of climate finance in 2019-20 went into adaptation.
However, in the medium term, schemes for carbon (pricing, tax, credit and trading and markets) and frameworks for financing adaptation are expected to come online - catalyzing the growth significantly. In the longer term, we should work towards having loss and damage included within carbon pricing calculations to have a fuller picture of the financial impact of our inaction.
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Quick Take:
- Currently, climate financing is still driven by stakeholder sentiment and regulation. Climate financing for adaptation lags behind financing for mitigation.
- In the longer term, it is likely we will have quantitative links with loss and damage and carbon calculations to have a fuller picture of the financial impact.
Inflections for Climate Financing
These are the points of inflections expected along the way:
- 1) Quality: The first that we are already seeing is the nexus between data availability vs data quality, which is what is fuelling the current greenwashing debate. It is likely that data quality will ultimately takeover once data comprehensiveness is achieved. However, there will be pushback from data consolidators who know that data quality is costly to achieve.
- 2) Frameworks: The second will come from the alignment of parameters. Even as the world is brainstorming on the best framework to use, various frameworks and approaches have arisen because of the different directions different stakeholders are taking in approaching the issue. One example would be the various scenarios, IPCC vs NGFS vs IEA. This is not unexpected, it helps to phase in the approach in the near-term, and while there is some alignment, that alignment is likely to cause more confusion over the longer-term.
- 3) Equity: The third will arrive from the discussion around a #JustTransition. The resource exploitation and unequal economic growth will take much longer to resolve. This is the point where climate discussions fall back into the ESG space and when ESG is driven by virtue. It will likely require a revolution beyond what current sustainability efforts can achieve.
We cannot accurately forecast everything that is going to happen, but we should learn from the past, and build together a better future.
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Quick Take:
- There are 3 points of inflections expected along the way: 1) when quality data is achieved, 2) Frameworks are aligned across sectors, and 3) equity becomes the driver.
Authors:
Matthias Ong is currently in CDP Singapore and has experience across the public, private and social sectors. Over the last 12 years, he has worked in the Ministry of the Environment and Water Resources (MEWR), PUB, Singapore’s National Water Agency, CH2M Hill (now Jacobs), Singapore Airlines (SIA) and MILK (Mainly I Love Kids) Fund covering various roles from policy maker, engineer, supply chain operations to social sector service leader. He oversees both physical and transition climate risk data and solutions, and has been involved in national and organisational wide sustainability efforts ranging from climate science capability building, GHG accounting, renewable energy deployment, policymaking and development of climate frameworks involving a wide range of stakeholders.
Ismail Weiliang is a climate resilience consultant with over half a decade of experience and specialises in flood risk advisory for Asia. His work involves advising governments and development banks on strategies to transform climate risks into resilience. He also founded a non-profit organisation “The Climatebender” that provides humanitarian relief to communities vulnerable to the climate crisis.
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